Chapter 11

It is recommended that at a minimum, we might want to investigate _________ scenarios in all, including the base case.

5

When reviewing a graph of data from sensitivity analysis, the ____________ the line, the ____________ the sensitivity of the estimated Net Present Value.

Steeper, greater.

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

The lowest variable cost per unit that can reasonably be expected

If a substantial percentage of the scenarios look bad, the degree of forecasting risk is high and further investigation is in order. (T/F)

True If a substantial percentage of the scenarios look bad, the degree of forecasting risk is high and further investigation is in order.

Fixed costs:

are constant over the short-run regardless of the quantity of output produced.

Sensitivity analysis determines the:

degree to which the net present value reacts to changes in a single variable.

The main focus of sensitivity analysis is to:

determine the one variable that has the highest level of risk.

To get the worst case scenario, we assign the least favorable value to each item. This means to assign low values for items like units sold and price per unit and:

high values for costs

Forecasting risk is defined as the possibility that:

incorrect decisions will be made due to erroneous cash flow projections.

The base case values used in scenario analysis are the values considered to be the most:

likely to occur

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

sensitivity

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

sensitivity

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis.

simulation

Variable costs can be defined as the costs that:

vary directly with sales

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

worst-case scenario analysis.